Completion risk and revenue risk together constitute the two most important variables that can impact the successful implementation of a project.

• Market risk could be on account of uncertainty in:

o determining the design for the project (also referred to as design risk) on the basis of future traffic which involves forecasting, changing elasticity of variables affecting traffic growth (transport projects), etc.;

o estimating demand (also known as demand risk) viz. demand uncertainty i.e. insufficient demand for products and services, for instance for water, compost (MSW treatment facility), power etc;

o structural changes in the industry itself which may result in insufficient demand for competing facilities, competing technologies/competition;

o wholesale structural changes, for instance, a large part of the population switching to electric scooters could result in lower toll collection on a bridge or bypass road, or a similar shift to bottled water for drinking/cooking purposes or large scale water re-harvesting may lead to lower demand growth for water, or the re-location of industries/new townships may impact public transport usage in one part of the city etc.

• Price/ Revenue risks typically include non-payment due to resistance from users, regulatory control over pricing, delays in revision of prices or such revisions not keeping up with the increase in cost of service delivery.

The agreement would usually set out the basis, periodicity and process for revision of tariffs and user charges. An assumption on future inflation may need to be made where tariffs would be indexed either whole or in part to changes in the Wholesale Price Index (WPI). Sensitivity analysis for varying levels of WPI increase, risk of unilateral reduction in user charges (for political reasons) or delays in notification of toll will be useful to see how the project cash flows withstand these changes.

Mitigation measures

• Where possible, firm throughput handling (ports) or off-take commitments for a significant part of the facility/ output would help address some of this risk.

• An assessment of the long-term cost competitiveness of both the input and output, and studies by experts when required as part of the project preparation would be useful.

• Financial incentives such as penalties and liquidated damages for interrupted/irregular supplies are often specified in the contracts. The adverse impact of some of these variables on the project can be assessed through a sensitivity analysis